US Pension Briefing – September 2024

Key takeaways

  • Discount rates fell for a fifth consecutive month as the Treasury yield curve became “uninverted,” ending the inversion that began in mid-2022 (i.e. the 2-Year yield is now less than the 10-Year yield), following a sharp decline in response to the Federal Reserve’s rate cut.
  • Equities surged, and fixed income market performed strongly as well.
  • Strong market returns for the month were largely sufficient to offset liability growth, leading to slight funded status improvements for most pension plans.

September 2024 summary

US Treasury yields fell sharply in September following the Federal Reserve’s larger than usual 0.50% rate cut, marking its first reduction since the COVID-19 pandemic began. This decision triggered significant market reactions, resulting in falling yields. Notably, the yields on shorter-duration bonds continued to experience more substantial declines compared to longer-duration bonds, with 2-year Treasury yields dropping below 10-year Treasury yields. This shift signalled a probable end of a prolonged period of yield curve inversion that began in mid-2022. We expect pension liabilities will have increased between 1.0% and 2.0%, depending on a pension plan’scharacteristics.

Fixed income securities posted strong returns across all sectors due to falling interest rates, helping to partially offset increases in pension liabilities.  

US and global equity markets experienced a positive trend in September, fuelled by supportive monetary policy as major central banks initiated a cycle of easing through rate cuts and stimulus measures. US equities performed strongly across most sectors, with the S&P 500 recording its best September return since 2013 and achieving five consecutive months of gains following the Federal Reserve’s rate cut. Market sentiment was further strengthened by hopes that the Fed could achieve a soft landing for the economy, particularly as unemployment claims fell to a four-month low despite signs of a hiring slowdown. Simultaneously, global stock indexes reached record highs during the month, driven by the Fed’s rate cut, easing US inflation, as well as significant monetary stimulus measures announced by China, including cuts to key interest rates to support its struggling property market.

While lower discount rates resulted in higher liabilities, the strong investment returns across nearly all sectors helped offset these increases. As a result, pension plan sponsors likely experienced slight improvements to their funded status, contingent on their asset allocation and initial funding levels.

Discount rates & asset returns

FTSE pension discount rate index last 12 months

Source: FTSE Pension Liability Index
Source: FTSE Pension Liability Index

Discount rates dropped again during September, decreasing by 0.10%. September marks the 5th month of consecutive decline, and rates are significantly lower than they were one year ago. The last time that we saw the FTSE Pension Discount Curve decline for 5 consecutive months was in the middle of 2017.  

US Treasury yield curve

Source: U.S. Department of the Treasury

The Treasury yield curve shifted lower across all maturities in September. The largest shifts occurred in the 3 and 6month maturities, which declined by 0.48% and 0.51%. Notably, the 2-year yield is now 0.15% below the 10-year yield. The next Fed meeting will be held in November. The Fed has indicated that another rate cut can be expected, and the pace of rate cuts will depend on incoming economic data.

September 2024 Investment returns (%)

Source: Morningstar
Source: Morningstar

September was a strong month for Emerging Markets Equities, posting a gain of 6.68%. This was primarily due to the announcement of monetary and fiscal easing measures by the Chinese government. US Equities and International Developed Equities made gains of 2.07% and 0.92% respectively. Within US Equities, Consumer Discretionary and Utilities were leaders, with respective gains of 7.09% and 6.60%. Energy was the worst performing sector, losing 2.68%. Fixed Income experienced positive returns as interest rates continued to fall, withlongduration bonds outperforming short-duration bonds. The US Dollar Index fell 0.90%, and the price of gold gained 6.38%. Credit spreads remained relatively flat compared to August month end, except for Emerging Market Debt, which tightened.

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